This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, click the "Reprints" link at the bottom of any article.

Before we proceed, let's discuss the difference between market neutral and long-short. A long-short fund can go to either extreme. With market neutral, the idea is to hold enough short positions to offset the risk of the long positions, in essence creating a "market neutral" effect. The S&P 500 has a standard deviation of 15 to 20 compared to 4.5 to 5.5 in the market neutral category. The long-short category is riskier than market neutral with an average standard deviation of 10 to 12.

My favorites here are Arbitrage I (ARBNX) and Merger (MERFX). Both funds have done well relative to their peers and their risk-return profiles have been good. Both are managed by a team and have lower-than-average expense ratios. Merger (MERFX) is mostly concentrated in the Americas while Arbitrage (ARBNX) has over 10% invested in Asia. Overall, I prefer Arbitrage I. Arbitrage did especially well after the tech bubble burst and only lost 0.55% in 2008. Management has been in place for the past 5.5 years.

Real Estate

Even though some do not consider real estate to be an alternative investment, I'll include it here anyway. Over the years I've looked for a good ETF to fill this spot, but my search always leads me back to the Nuveen Real Estate Secs I (FARCX) fund. Despite losing slightly more than 34% in 2008, FARCXranked in the top quartile in its category. In fact, it has ranked no worse than the top half of its peer group in every year since 2002. In 2005, ‘06, ‘08, and ‘10, it ranked in the top quartile. This fund has a very good risk-return profile, a low expense ratio, and management has been in place for more than seven years.

Commodities

This is an exciting category as you can invest in specific commodities or in an entire basket. This is a place where ETFs dominate. You can buy corn, gas, oil, gold or just about anything you desire. My choice here is Greenhaven Continuous Commodity Index (GCC). This ETF invests in a diversified basket of goods which includes cotton, wheat, coffee, sugar, silver and more. GCC has a good risk-return profile, low expense ratio and management has been in place for 4.5 years.

NOTE: I have been out of commodities since mid-2011 due to the forecasted global economic slowdown. In general, this was a good decision, though some commodities have done well since then thanks to the drought.

ThinkAdvisor's TechCenter is an educational resource designed to give you a competitive edge by keeping you abreast of new tech innovations and need-to-know information that can be applied to your business.